LAWRIE WILLIAMS: Still stronger gold price ahead - Credit Suisse

Six months is an awful long time in bank analysts’ predictions of what lies ahead – particularly in precious metals.  At the end of 2015 and at the beginning of the current year, these forecasting ‘experts’ were almost unanimous in predicting a negative future for the gold price.  This was exemplified by this year’s LBMA precious metals price competition forecasts for the year ahead.  These forecasts were made by some of the top analysts from the financial sector and were notable for how wrong they have proven to be, at least as far as the year to date is concerned.

Of the LBMA gold price forecasters only three of the 31 participants predicted a gold price high for the year of above $1,300 – yet this has been exceeded already at the halfway point.  There was only one analyst predicting +$1,350 gold - Martin Murenbeeld, who came in at $1,375 and his fellow analysts will have considered this a way out on a limb prediction.  Not now!

For silver, only four analysts predicted a high price for the year of over $18 – interestingly the highest prediction came from Natasha Kaneva of JP Morgan at $18.66 – the bullion bank said to have amassed a huge holding of physical silver over the past few year.  But even this pales into insignificance given the silver price as I write is at $20.31!  So much for the ‘expert’ predictors.  And there's still almost six months to go  to the year end - although the metal could, of course move either way over the period.

But the analysts are nothing but reactive.  Those at bank after bank have been busy revising their forecasts upwards.  Even ultra-bearish Goldman Sachs has reluctantly increased its average gold price forecast for the three, six and 12 month periods from mid-May to $1,200, $1,180, and $1,150 from $1,100, $1,050 and $1,000 respectively, so still remains very bearish overall.  (Those who followed the bullion bank’s advice to short gold at $1,205 in February and again in April when gold was trading around $1,230 will have lost out big time.)

The latest major bank to publish a quarterly update of commodity and FX prices is Credit Suisse and, commensurate with the gold price performance post-the UK’s Brexit referendum vote is seeing things in a much more positive light predicting more upside ahead.  They now forecast that they see the gold price continuing to increase through 2016 and believe the $1,500 mark could be tested by late in the year, or early next as the implications of the Brexit vote are clarified, and the U.S. Presidential election weighs on sentiment towards the end of the year.

In more detailed terms, the bank’s analysts are looking to see gold averaging $1,475 in Q4, $1,500 in Q1 2017 with an average price next year of $1,450. However they are obviously not quite so bullish longer term in only increasing their long term price outlook to $1,300 (from $1,200) as they incorporate their expectations of long-term gold demand from a variety of drivers; including central bank diversification and consumer asset diversification in light of the current global economic outlook.

They do claim, that they did see positive moves in gold even before Brexit, and to be fair they were a little ahead of the game here in predicting a $1,300+ price level back in April.  They point to having envisaged a strong chance of additional QE from the Eurozone, a 12-18 month period of negative real rates in the U.S. and continued wealth diversification globally from central banks and consumers given the uncertain macro environment. They are thus increasing their investment demand forecasts for 2016 and 2017 to reflect continued strength from ETFs and bar/coin hoarding while continuing to expect mine supply to decline over the next three years.

We have noted before that bank analysts in particular are mostly reactive rather than proactive in their forecasting and, in fairness they probably have a duty to their customers to remain conservative in their outlook.  The Credit Suisse opinions are an example of this process and follow on from a number of other banks also having increased their medium term forecasts.  Perhaps the Goldman Sachs calls, though are examples of the dangers of occasional bank analysts being pro-active in their advice and getting things horribly wrong in the short to medium term.

04 Jul 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com